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Upturn In German Economic Sentiment Boosts Recovery Hopes: Capital Economics

The renewed improvement in Germany's economic sentiment indicates that the economy is set to record stronger growth in the second quarter, Capital Economics Senior European Economist Jennifer McKeown said Friday.

Capital Economics said that the faster-than-expected rise in business sentiment, as revealed by the latest survey by the Ifo Institute, signals that the German economy will likely expand 2 percent annually in the second quarter, following the first quarter's 0.3 percent contraction.

The firm, however, cautioned that the pick-up in growth would be only modest this year, leaving the annual average at around zero, which will not be enough to make a big difference to the periphery or to drag the euro-zone as a whole out of recession.

The Ifo survey showed that the the business confidence index increased to 105.7 in May from 104.4 in April, and beat economists' expectations.

The improvement in sentiment was mainly due to positive assessment of the current conditions sub-index, while the expectations component stayed unchanged. Among major sectors, sentiment increased in manufacturing, wholesale and retail.

Elsewhere, the forward-looking consumer confidence index compiled by GfK advanced to 6.5 in June from in May, hitting the highest level since September 2007.

Underscoring the outcome of the consumer confidence survey, the latest GDP data released by the statistical office showed that consumer spending in Germany increased 0.8 percent sequentially in the first quarter, while the economy as a whole expanded just 0.1 percent, adding to hopes that robust labor market conditions are finally generating a consumer recovery.

Meanwhile, damping the prospects for a strong economic recovery, the GDP data showed that German exports and investment both declined in the first quarter, with the former presumably reflecting both the high level of the euro and very weak demand from elsewhere in the euro-zone.

by RTT Staff Writer

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